A steady recovery observed in the manufacturing sector has helped India climb two notches to the third position among key emerging markets in September, said Mints emerging Markets tracker. China and Brazil are the only two other countries which rank better.
The manufacturing growth has reflected in the first year-on-year rise in exports in seven months, and the highest reading of the purchasing managers’ index in over eight years. In the month of September, India’s merchandise exports rose 6% on-year to $27.6 billion.
Before this, exports witnessed a year-on-year rise in February, even before the World Health Organization declared covid-19 a pandemic. During the first full lockdown month in April, exports fell 60%, but the contraction had been easing since.
However, the growth in September should be taken with a pinch of salt, given a low base.
It is observed that, among other emerging markets that have reported their exports data for September, only China (10% growth) has shown better growth than India. While the other emerging markets show that exports were still below last year’s levels.
The seven indicators in the tracker encompass both real activity indicators, such as the manufacturing purchasing managers’ index (PMI) and real GDP growth, and financial metrics, such as exchange rate movements and changes in stock market capitalization. The final rankings are based on a composite score that gives equal weightage to each indicator.
The observed rise in exports has lifted India’s manufacturing PMI, which had already returned to the expansion path in August, which further improved to 56.8 in September, the highest since early 2012. Apart from India, only Brazil, showed a PMI reading of 64.9, and delivered a better performance.
Other real activity data, such as automobile sales and railway freight loading also point towards recovering economic activity in India.
It is believed that the improvements have likely been driven by easing of localized pandemic-related restrictions, slower spread of the coronavirus, and the onset of the festive season in India.
The weekly Business Resumption Index, compiled by Japanese brokerage Nomura, shows the progress broadly continued into October.
However, Nomura warns that the improvement might signal just a “faux recovery” limited to festive consumption. The brokerage firm also fears coronavirus picking up again during festivals could undo the gains made.
Speaking of retail inflation, India’s consumer price index-based inflation rate, which breached the central bank’s upper limit of 6% in April, has rose to 7.3% in September. Only Turkey’s inflation rate of over 11% was higher among other emerging markets. According to a report by ICICI Securities Primary Dealership, the Inflation could start softening after December with a decline in vegetable prices, easing of supply chain disruptions, weak demand and a favourable base effect.
RBI also anticipates return of inflation to its target range in the ongoing quarter, and further decline to 4.5% in January-March 2021. Further, RBI expects the economy to witness growth in the final quarter of the year. However, the deeper-than-expected GDP contraction in the first quarter could weigh down the full-year growth rate. the RBI expects GDP to contract 9.5% in 2020-21, while the International Monetary Fund projects a 10.3% contraction, the worst among EM peers.
The month of September also saw a rise in the stock market capitalization of 2.5% sequentially, which was the highest among the EM economies considered in the tracker. The growth was tracked despite net capital outflows during the month.
The positive performance of the markets can partly be attributed to increased activity among domestic investors, both retail as well as high-net-worth-individuals (HNIs), in the last few months. Moving forward, the financial markets could experience volatility due to the US presidential elections and a second wave of coronavirus in Europe.
Furthermore, in the month of September, the Indian rupee also appreciated 1.5% against the US dollar, while the Mexican peso (2.4%) and Chinese yuan (1.7%) are the only two emerging market currencies in the tracker that outperformed the Indian rupee. Now that India witnesses an improvement in its coronavirus situation and see the mobility returning to pre-pandemic levels, the focus has shifted to pacing up economic recovery.